TL;DR:

Renew Holdings is an impressive turn-around story, with further to go, but the substantial re-rating in share price means that it's no longer cheap and the risk:reward balance does not favour new investors.

A story of three halves

Renew Holdings is an AIM listed engineering services business with a colourful history. Founded as YJ Lovell in 1786 the company prospered for over two hundred years before the wheels came off in the early 1990s; a result of over-diversification and over-confidence. One debt for equity swap later, in 1993, the business stumbled on as YJL Plc until the millennium but it remained one of the walking dead. At the turn of the century another wholesale reorganisation took place and out of the fire-sale, in 2001, emerged Montpellier Group.

However while Montpellier Group looked like a brand-new company, slimmed down and debt free, on the inside it seems that nothing really changed. Just a few short years later, in 2004, problems with incorrectly priced contracts and provisions for losses left the board staring into the abyss. The business model was broken. So once again the company reinvented itself with new management, new acquisitions and new focus; this is how Renew Holdings came to life in 2006. Since then the strategy has been one of growing the core Engineering Services business both organically, and by acquisition, and so far this is working out well.

My point in looking back like this is that while Renew Holdings appears to be a company transformed it's also made repeated visits to the corporate intensive care ward over the last 25 years. Some companies have an internal culture that's accident prone and I do wonder if that's the case here (never mind that the industry is low-margin, competitive and cyclical)? History suggests that sooner or later a contract will turn sour and that's a big risk with such a concentrated client base.

That said for an enterprise built on acquisitions, with group companies continuing to trade under their own good name, it has a clear operational focus in the key markets of Energy (including Nuclear), Environmental and Infrastructure engineering. These areas are largely governed by regulation and benefit from non-discretionary spending programmes giving long-term visibility of committed funding. As a result trading is less exposed to the volatility inherent in the sector and the board should be able to depend on contracted cash-flows.

This change…

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